P plc has in issue $500,000 10% irredeemable debentures. Investors currently require a return of 8% p.a. Required: What will be the market value of the debt?

To calculate the market value of the debt, we need to determine the present value of the future cash flows associated with the debentures.

Step 1: Calculate the annual interest payment The annual interest payment can be calculated by multiplying the face value of the debentures ($500,000) by the interest rate (10Annual interest payment =$500,000 * 10% = $50,000

Step 2: Determine the present value of the annual interest payments To determine the present value of the annual interest payments, we need to discount the future cash flows at the required return rate of 8% per annum. We can use the present value of an ordinary annuity formula to calculate this: Present value of annual interest payments = Annual interest payment / Required return rate Present value of annual interest payments = $50,000 / 8$625,000

Step 3: Calculate the present value of the principal repayment Since the debentures are irredeemable, there is no principal repayment. Therefore, the present value of the principal repayment is zero.

Step 4: Calculate the market value of the debt The market value of the debt is the sum of the present value of the annual interest payments and the present value of the principal repayment: Market value of the debt = Present value of annual interest payments + Present value of principal repayment Market value of the debt = $625,000 +$0 = $625,000

Therefore, the market value of the debt is $625,000.